Engines of U.S. growth hard to find

Economy slowed by government shackles, cautious consumers and companies

WASHINGTON (MarketWatch) — U.S. growth was sputtering before the government shutdown in early October, and judging by the latest look under the hood, it could take a while before the economy generates enough power to get over the latest speed humps.

A series of economic roadmaps such as job creation and business investment point to decelerating growth toward the end of the summer. And a batch of data this week, led by retail sales in September, is expected to support the view of an economy struggling to gain traction.

With the brakes partly applied to growth, the Federal Reserve is virtually certain to maintain its massive stimulus program aimed at boosting the economy. Top central bankers meet Tuesday and Wednesday to plot their strategy for the near future.

As recently as last month, the central bank had been expected to start to cut back on bond purchases meant to keep U.S. interest rates low.

Drip, drip, drip

So what happened? For starters, interest rates jumped over the summer in anticipation of the central bank reducing its bond purchases. The spike in rates, though still low by historical standards, appears to have constrained the resurgent housing market and may have caused consumers to put off other large purchases. Housing has been one the economy’s few growth engines in 2013.

At the same time, companies cut back on hiring after a burst of job creation earlier in the year. Prolonged softness in the labor market has also kept a lid on wages, capping the ability of consumers to sharply boost their spending, especially after a tax increase at the start of 2013.

“I think the economy in general, and retail in particular, were already slowing down,” Brown said.

For September, economists polled by MarketWatch forecast little change in sales at U.S. retailers, largely because of a modest drop in auto purchases. Sales probably rose excluding autos.

Still, retail stores are simply not selling enough goods to click the economy into a faster gear. And without more consumer spending, businesses are hesitant to ramp up investment despite the ridiculously cheap cost of borrowing. The government shutdown merely exacerbated the uncertainty.

Bloomberg

Workers assemble a Boeing Co. 737 airplane.

“It may not be until next year that we see a pickup in business investment and hiring,” said Sal Guatieri, senior economist at BMO Capital Markets.

Fed up with the Feds

Most economists point the finger at government when divvying up blame for lackluster U.S. growth. Repeated budget showdowns over the past few years have disrupted the economy again and again. And Congress still hasn’t resolved all the disputes left over from the now-ended shutdown. It could take several months before consumers and businesses know if the coast is clear.

Another potential slick patch is the new health-care law commonly known as Obamacare. The disastrous rollout of the new law has only added to the confusion over how much it will cost new consumers to sign up and for businesses to comply. That could also temper plans to hire full-time workers into early 2013.

“Many employers are trying to find out what Obamacare is going to cost them,” said J.J. Kinahan, chief strategist at TD Ameritrade. “I think you’ll continue to see temporary jobs increase until they figure that out.”

A key survey of manufacturing executives could provide insight into hiring intentions when it’s issued on Friday. The Institute for Supply Management’s closely followed survey is forecast to dip slightly to 55% in October from a strong 56.2% reading in September.

Wall Street also pays close attention to the ISM’s employment gauge because it has a generally good track record of signaling labor-market trends. That index posted a surprisingly strong 2.1 percentage point gain in September to reach 55.4% — the highest level in more than a year — but the government’s own employment report showed just a scant 2,000 increase in manufacturing jobs in the same month. And manufacturers failed to create as many new jobs in August and September combined as they eliminated in July.

One thing is sure about the uneven course of the economy: it will prevent inflation from getting out of hand despite the huge stimulus by the Fed. Wholesale and consumer prices have risen less than 2% over the past year and are below the central bank’s acceptable target for inflation.

The producer and consumer prices indexes for September might show modest increases, largely because of elevated gas prices. Both reports will be issued this week before the Fed concludes its meeting.

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